CreditCardCo Blog

With a still-growing subprime credit sector, many banks and collection agencies are looking for ways to collect old debt that they’re no longer allowed to pursue. One of those methods are debt collection credit cards. Many say it’s a fresh start to rebuilding their credit histories. Others insist it’s unethical and questions about the legality of this new practice are cropping up.

New Credit Card Offer

These new debt collection credit cards are marketed by promising subprime borrowers, whose credit might have taken a hit in recent years, the opportunity to start over. Banks are looking for new ways to raise profits while debt collectors are looking for new ways to collect on debt that’s no longer being pursued due to statute of limitations concerns. Both groups tout this new sector as a way to jump start the economy. Lawmakers are saying it’s misleading and could create a mountain of problems for consumers.

Looking for a Way Out

Because so many consumers are struggling to rebuild their credit, they often miss the big picture. It’s true that both banks and debt collectors walk away with new revenue streams, but consumers are often entering into these arrangements with no idea that they’ve just opened the door for these agencies to begin collection efforts again.

By re-energizing the old un-collectable debt, collection agencies are given free rein to restart the clock, so to speak, in their efforts. Collectors win since in many cases, the debt has exceeded states’ statutes of limitations. This essentially makes it unnecessary for these debtors to begin the cycle of debt once again.

It’s a tempting offer for consumers with less than ideal credit and who might not otherwise qualify for traditional credit. Offered by the collection companies, there’s no way to distinguish them from any other card. They feature the logos of popular brands such as MasterCard or Visa.

Who Benefits?

While the benefits for debt collectors and banks are easily and instantly seen, the benefits for consumers might not be so easily fleshed out. First, these cards have much higher interest rates. Consumers are essentially now paying high interest on an old debt that includes interest charges from the original account. Here’s what many consumers aren’t always aware of though: by “bringing the debt back to life” it restarts the clock on efforts to collect the debt.

If a consumer has an old debt, from, say, five years ago and that consumer’s state’s laws prevent a creditor from pursuing the debt after three years, there are no legal recourses the debt collector can take at that point. If, though, the consumer enters into an agreement with the debt collector where he receives a credit card in return for agreeing to pay the debt off, he’s essentially given that debt collector a fresh turn for the statute of limitations.

ReAging

Federal agencies and lawmakers have come down hard on on these credit cards. They say they’re not convinced the consumer is being told the whole story about fees, the statute of limitations – “re-aging” – considerations and the additional interest. Once cardholders agree to make a payment, all bets are off and they’re on the line again for the debt. These collection agencies are then free to revert to the standard aggressive collection practices – including filing lawsuits.

Banks are eager and willing as well. They are able to collect fees, along with high interest rates, when they partner with collection agencies. Most contracts between these two bodies place all the risk on the debt collectors. Collectors aren’t afraid of the risks in issuing new credit cards because they are suddenly turning profits on what would otherwise be dead debt. They purchase these troubled accounts for pennies on the dollar, therefore, their investment is returned often as soon as those consumers make the first few payments. It’s instant assets for these collection agencies.

Not only that, but there’s also a moral obligation that both collectors and banks say consumers should have. Most consumers agree with that, too. The problem, according to consumers, is the poor state of the economy. With bankruptcies and foreclosures on the rise again, along with unemployment numbers, it’s as difficult now to pay off debt as it was at the start of the recession four years ago.

Verify the Debt

The National Consumer Law Center has weighed in on this practice, too. Lauren Sanders, who is the managing attorney for the agency said,

Consumers might be better served by ignoring a call about an old debt and instead, sending the collection agency a letter stating they don’t recognize the debt or requesting the agency verify the debt before contacting the consumer again.

It’s expected there will be more attention placed on these new hybrid accounts as they begin to increase in popularity. What ultimately happens will rest largely on how successful these initial dynamics prove to be.